Making Cents: Beneficiary elections override wills

John P. Napolitano

Wednesday

Feb 23, 2011 at 12:01 AMFeb 23, 2011 at 11:16 PM

Whenever people think about finances, they automatically think about how much money they have, what they need and how it is invested. But much more matters, especially for those you have in mind to inherit your assets.

Whenever people think about finances, they automatically think about how much money they have, what they need and how it is invested. But much more matters, especially for those you have in mind to inherit your assets.

The same is true of beneficiary elections. Your will may say, for example, that you want everything to go to your spouse. But the beneficiary election will override whatever your will says. A common example is in the case of newlyweds or recently widowed or divorced spouses.

Think in terms of a life insurance policy at work. When you began employment, you signed a bunch of papers for benefits. Among them is commonly a group term life insurance beneficiary election. You would be surprised to see just how many of those beneficiary elections are outdated or even left blank. How happy would you be if your spouse had the proceeds from life policies going to a former spouse? This is not only the case for group term policies; it is true of all life policies. The named beneficiary will get the proceeds, period.

Beneficiary elections come into play on more than just life policies. They also play a significant role with retirement plans: an IRA, SEP, 401(k) or pension. All qualified retirement plans are directed to the next generation via beneficiary election. Absent a person as named beneficiary, the balance of your plan will go to your estate. That causes a few significant problems for survivors. First is that of future ownership.

The future ownership of the plan balance will be subject to the terms of your will, if you have one. This also leaves your retirement plan balance open for challenge since will contests are relatively easy to institute. You better believe that your black sheep brother or the child that you haven't seen in years will show up for this party.

In addition to will contests, the delays of probate and its administrative hassles, not naming a beneficiary for your retirement plan can be a major tax blunder. Inheritors of an IRA with no beneficiary elections will be required to pay taxes on the money immediately as if the IRA owner withdrew the funds themselves. If the sole beneficiary and executor of your estate under your will is a spouse, you may be able to get some tax relief by applying for an IRS private letter ruling.

Why leave it to chance? This issue, not properly planned, will simply create even more stress for survivors.

John P. Napolitano is the CEO of U.S. Wealth Management in Braintree, Mass. He may be reached at jnap@uswealthcompanies.com.

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